Fee-Splitting Agreement Not Disclosed To Court In Class Action Fairness Proceedings Precluded Later Suit To Enforce The Agreement

In our July 28, 2008 post, we discussed Manley v. Burunsuzyan, an unpublished decision that reinforced the need for client consent to a fee-splitting arrangement between counsel pursuant to Rules of Professional Conduct, rule 2-200(A).Aside from the need for client consent, there is an additional rule that must be complied with in class action cases.California Rules of Court, rule 3.769(b) requires that any fee arrangement between counsel about fees “must be set forth in full in any application for approval of the dismissal or settlement of an action that has been certified as a class action.” Rule 3.769(b) was squarely at issue in the next discussed opinion emanating from our local Santa Ana-based Court of Appeal.

In Mark v. Spencer, Case No. G038314 (4th Dist., Div. 3 Aug. 22, 2008) (certified for publication), two attorneys and likely now former friends (Mark and Spencer) entered into a fee agreement to act as co-counsel in a class action, agreeing to split any fees generated in the case.A settlement was reached in the case.Although both attorneys sought fees, nothing in the papers or argument made at the fairness/fee application hearing disclosed the existence of the fee-splitting agreement to the trial court.(Curiously, Mark did not even appear at the hearing on his fee application.)The trial court approved a little over $401,000 in fees to Spencer and only about $76,500 in fees to Mark.Spencer failed to honor their fee-splitting agreement, which inspired Mark to sue Spencer in a second suit.The trial court sustained Spencer’s demurrer without leave based on failure to comply with rule 3.769(b) and on res judicata grounds.Mark appealed.

Justice Aronson, on behalf of a 3-0 panel of the Fourth District, Division Three, affirmed both grounds of the dismissal below.

Mark’s failure to comply with rule 3.769(b) was fatal to enforcing the agreement between counsel in a separate action.In this respect, the appellate panel followed almost identical reasoning in Rebney v. Wells Fargo Bank, 220 Cal.App.3d 1117, 1142-1143 n. 8 (1990).It dismissed Mark’s challenge as follows:“Because an existing fee-splitting agreement could affect a class action court’s decision to approve a proposed settlement, attorneys would have little incentive to disclose the agreement if they could simply enforce it in a separate action.To avoid encouraging the violation of rule 3.769(b), and the potential harm to class members from undisclosed conflicts, we apply the same prophylactic rule the Supreme Court applied for violations of Rules of Professional Conduct, rule 2-200, and hold that the parties’ failure to fully disclose the fee-splitting agreement to the [class action] court when they petitioned for approval of the class action settlement bars later enforcement of the agreement.” (Slip Opn., at p. 9.)

Independently, Justice Aronson agreed that Mark’s subsequent claims were barred by the doctrine of res judicata.Mark had fair opportunity to bring the fee-splitting agreement to the court’s attention and his claimed ignorance of the rule was no excuse.Because the court must fully consider attorney’s actual efforts to benefit class members when awarding fees, the trial court below was not blindly tethered to the Mark-Spencer fee agreement, especially based on the judge’s verbal comments that he found Mark’s work on the case was not as valuable as Spencer’s.(See In re Vitamin Cases, 110 Cal.App.4th 1041, 1056 (2003) [co-liaison counsel should not normally determine fee allocation after the fact; this is usually reserved for the trial court to do before fees are awarded].)

Even though Spencer did not honor his bargain with Mark, public policy reasons justified the result.

BLOG OBSERVATION—Disclosure is usually heightened in class actions because of the presence of absent class members who cannot protect their rights.Even though class notice was sent out, no one knew about the existence of the fee-splitting agreement between counsel.This case cautions that attorneys choosing to practice in the class action area need to be familiar with not only class action concepts but ethical rules which delineate some of the attorneys’ fiduciary duties to the class.